Whether you’ve had a small business for years or you’re getting ready to launch one, budgeting is an essential part of your future success. Paying attention to the money flowing in and out and understanding how much of your own funds you should be willing to put on the line are key factors to know if you want to stay afloat — and thrive.
Aim To Recoup Your Startup Costs in the First 2-3 Months
Many small businesses will require an initial investment to get started. To figure out how much a reasonable investment is, first figure out how long it will take to get that money back.
“The faster the business makes whatever money you put into it back, the easier this decision is,” Ramsey said.
On an episode of “The Ramsey Show” a caller asked if investing $5,000 — 5% of her full-time income — is a reasonable amount of money to invest in her new business.
“Yes, because we’re going to recoup it two months, maybe three,” he said. “If it drags out a year, you would have been better off doing something else and saving your money.”
Don’t Invest More Money Into a Business Until You’ve Recouped Your Initial Investment
If your business isn’t turning a profit as quickly as you had hoped, you may be tempted to spend more to scale your business to up its earning potential. However, Ramsey advises against this.
“That’s the trap you can get into, the wormhole you can go down,” he said on his show. “Just go make money with the business. Where people get off track is they keep thinking, ‘I need to grow my business.’ Only after you really get things moving do we worry about that.”
Write Your Budget Down
While you may have a mental tally of your revenue and expenses in your mind, Ramsey said that it’s a good idea to write everything down.
“Putting them down on paper gives you tremendous power over them,” he said on the “EntreLeadership” podcast. “When they’re floating around in your brain only as chaos, they have power over you.”
Your budget should account for your revenue and all of your spending, including items like payroll, rent, cost of goods and marketing expenses.
Save Up for Large Purchases Over Time
Instead of making a large purchase such as a piece of equipment right away and taking on debt, Ramsey recommends saving for the purchase over time.
“When you start spending dollars on your business expenditures that you’ve actually saved, you are better at it,” he said on the podcast. “You’ll buy a different piece of equipment.”
That’s because you have more time to figure out what you actually need rather than what you want at the moment. Once you have figured out how much you have to save to make the purchase, earmark part of your retained earnings each month to put toward it, Ramsey said.
More From GOBankingRates